East Coast rebuilds a battered franchise

November marked the first anniversary of the return of Britain’s East Coast franchise to state control. Keith Barrow looks at how custodian Directly Operated Railways is rebuilding the franchise for a return to the private sector.

THE EAST COAST Main Line is often encapsulated in images of streamlined steam locomotives, the sweeping curved roof of York station and the towering arches of the Royal Border Bridge. The route from London to Leeds, Newcastle, and Edinburgh retains its status as one of Britain's premier main lines, yet the recent history of its inter-city franchise has not been a happy one.

Following privatisation, Great North Eastern Railway (GNER) became the first franchisee in 1996 and quickly acquired a reputation for innovation and good service, and its term was subsequently extended for two years. When the franchise came up for renewal in 2004, GNER was keen to retain control and bid £1.3 billion to clinch a second term, which would run until 2014. However, it quickly became apparent that revenues would not sustain such an ambitious premium curve, and with parent company Sea Containers in financial difficulty, GNER surrendered the franchise in 2006.

National Express East Coast (NXEC) succeeded GNER in 2007 promising to pay an even heftier £1.4 billion to run the franchise until 2015. Within months however the new incumbent's projections were looking decidedly shaky as an unforeseen economic downturn began eroding revenues, and in early 2009 NXEC asked the government for financial assistance. This was not forthcoming and the company defaulted on the franchise.

NXEC's early exit led to the creation of a public company, Directly Operated Railways, whose purpose is to operate the franchise, now known as East Coast (EC), and prepare it for an eventual return to the private sector.
"What EC found after the takeover bore all the hallmarks of a business that had failed twice," explains EC chairman Mrs Elaine Holt. "Regular disruption and significant cost-cutting has affected the franchise. There was a culture of blaming others and a lack of management stability, which meant priorities changed frequently."

In an effort to cut operating costs, NXEC and GNER had attempted to reorganise their train maintenance activities. EC's depot in Edinburgh had lost skills in maintaining electric trains, while its London depot no longer had adequate experience of diesel HSTs. In one case, this meant an electric set had to be hauled 600km from Edinburgh to London for a pantograph change because the depot was no longer able to test new pantographs.

Outsourcing of train door maintenance ended under NXEC, but its own maintenance staff were not given the training to compensate. The result was a spike in power door failures and Holt says this became "the number one reliability issue." Performance monitoring ended in 2005 and the leasing company has not been involved in fleet planning for electric trains since 2004. NXEC also closed its air-conditioning maintenance facility.

Since it took over, EC has been rebuilding its engineering capabilities to restore its fleet performance. Yet punctuality is still a major problem and EC is Britain's worst-performing franchise at a time when the average on-time figures for long-distance operators is rising. EC says this is largely a result of external factors, and between April and October 60-70% of delays were caused by infrastructure problems. As a purely long-distance operator EC runs 136 services per day, so one incident can have a huge impact on performance.

This year EC has been affected by successive problems from lineside fires to catenary problems, broken rails, and landslips. "What hit the railway over the last six months has been a few major incidents," says Network Rail operations and customer services director Mr Robin Gisby. "This would be a challenge to any operator. If a major group took over today it would still be a big challenge."

EC also has to contend with the biggest timetable change in 20 years, with 20 additional services being introduced from next May. To provide extra capacity, EC will operate an 11-car Pendolino emu on London - Glasgow services from July.

The Department for Transport (DfT) expects to re-let East Coast in mid-2012, although with West Coast and several other franchises due to expire around the same time this may not be possible. Holt expects refranchising to begin by the end of 2012, although she says EC has a lot work to do in the meantime. "Big cost-cutting has had a negative impact on this company and it's a big challenge for any management team to sort out in just two years," she says.

Holt says EC's premium payments are above target, although they still fall significantly short of the levels NXEC promised three years ago. Such was the precarious nature of NXEC's bid that when revenue growth began to fall below the predicted curve, the franchise quickly sank in a frenzy of desperate and uncoordinated cost-cutting, with obvious dire implications for service quality. This highlights a fundamental failing of the franchise system in Britain - a bidder promising highly-ambitious gains in revenue performance can be handed the keys, despite the inherent risks of promising perpetual growth.